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Slowing Indonesian Economy Puts These ETFs in Focus

Sweta Jaiswal, FRM

The latest GDP data on the Indonesian economy has disappointed investors amid concerns over global economic slowdown. The country’s GDP in first-quarter 2019 rose 5.07%, lower than the median estimate of 5.2%, per a Bloomberg survey of economists, Indonesia’s GDP also missed the 5.18% growth estimate according to a Reuters poll.

With Jakarta Stock Exchange Composite Index having returned only 1% year to date, the latest data is expected to do no good. Moreover, to make the situation more intense, the trade war between the United States and China is concerning.

Let’s take a look at the factors that may have led to the disappointing results.

What’s Hampering Growth?

Indonesia had to grapple with sluggishness in exports in the quarter along with rising imports. Per a Bloomberg article, the country’s exports fell about 2% year over year. Over the last decade, the country has been seeing mounting pressure on imports for oil and gas along with various other significant items. However, net exports drove GDP in the quarter.

Indonesia’s household spending growth is decelerating and stayed at 5% in the reported quarter. After six rate hikes in 2018, Bank Indonesia is shifting toward a dovish stance on interest rates. However, the country is facing slowing investment growth. The Fed rate hikes last year made the U.S. economy more attractive to investors in comparison to emerging economies. Falling commodity prices, weakening Rupiah and upcoming presidential elections are also keeping investors on the edge as they are waiting for some clarity.

Moreover, the United States and China are two major trading partners and the ongoing trade war is affecting the Indonesian economy. Per an article on Global Business Guide, Indonesian economy suffers a 0.11% setback for every 1% decline in China’s economy. Moreover, a 1% decline in U.S. economy affects the Indonesian economy by 0.05%. Sadly, the trade war tensions between the countries seem to be escalating. President Trump’s latest move to raise tariffs to 25% from 10% on $200 billion of Chinese goods might have ‘trumped’ hopes of many investors waiting for a truce between the economies.

Indonesian ETFs in Focus                                                                     

Against this backdrop, let’s take a look at some Indonesian ETFs.  

iShares MSCI Indonesia ETF EIDO 

This fund tracks the MSCI Indonesia IMI 25/50 Index. There are currently 75 holdings in the pool of funds. The fund has an AUM of $621.2 million and an expense ratio of 0.59%. The fund has returned 0.7% year to date. It has a Zacks ETF Rank of #3 (Hold) and a High risk outlook. 

VanEck Vectors Indonesia Index ETF IDX 

This fund tracks the MVIS Indonesia Index comprising securities of companies that are incorporated in Indonesia or outside but have at least 50% of revenues/related assets in Indonesia. There are a total of 43 holdings managed by the fund. The fund has an AUM of $43.6 million and an expense ratio of 0.57%. The fund has returned 1.1% year to date. It has a Zacks ETF Rank of #3, with a High risk outlook. 

Bottom Line

For 2019, the Indonesian government is estimating economic growth at 5.3%, while the central bank projects growth in the range of 5-5.4%. With elections round the corner, the government is focused on boosting domestic investment and household expenditure to improve the economy in 2019. In fact, the Ministry of Social Affairs has provided a social assistance budget of 381 trillion IDR in 2019, up 33% year over year (per a Global Business Guide article). Thus, it will be prudent for investors to wait and watch how the economy grows over time, given the current geo-political scenario.

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VanEck Vectors Indonesia Index ETF (IDX): ETF Research Reports
 
iShares MSCI Indonesia ETF (EIDO): ETF Research Reports
 
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